This paper studies the effect of changes in foreign competition on the structure
of compensation and incentives of U.S. executives. We measure foreign competition
as import penetration and use tariffs and exchange rates as instrumental variables to
estimate its causal effect on pay. We find that higher foreign competition leads to
more incentive provision in a variety of ways. First, it increases the sensitivity of pay
to performance. Second, it increases whithin-firm pay differentials between executive
levels, with CEOs typically experiencing the largest wage increases, partly because
they receive the steepest incentive contracts. Finally, higher foreign competition is also
associated with a higher demand for talent. These results indicate that increased foreign
competition can explain some of the recent trends in compensation structures.